Working Paper: CEPR ID: DP2736
Authors: Alexander P. Ljungqvist; William J. Wilhelm Jr.
Abstract: Non-US firms frequently pay a substantial premium to have a US bank lead their initial public offering of equity, even when the issuing firm is not seeking a listing on a US exchange. We provide evidence that this decision reflects an expectation that US banks deliver a higher quality bundle of underwriting services. Specifically, a non-US issuing firm that includes a US bank in its underwriting syndicate can expect to have its offering underpriced by 17.7% less than had it not included a US bank in the syndicate. Failure to account for the endogeneity of the decision to hire a US bank vastly understates the magnitude of the effect. This finding has direct implications for the claim that US bank spreads for domestic IPOs are above competitive levels.
Keywords: Initial Public Offerings; Investment Banking; Underwriting Spreads
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| failing to account for endogeneity (C20) | understatement of the effect of hiring US bank on underpricing (G24) |
| quality of underwriting services (G22) | decision to engage US banks (G28) |
| non-US issuing firm includes US bank in underwriting syndicate (G24) | underpricing decreases (D41) |
| decision to hire US bank (G21) | anticipated benefits of lower underpricing (G19) |
| presence of US bank (G21) | lower underpricing (D49) |